San Francisco’s slow post-Covid recovery is a struggle for small businesses

An Airbnb-funded billboard displays opposition to Proposition F in downtown San Francisco, California.

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Marshall Luck’s chiropractic and massage practice in downtown San Francisco survived the Covid-19 pandemic thanks to the government. stimulus money and big debt. But more than two years after lockdowns swept across the city, his business has returned to only 70% of pre-pandemic levels.

Like many of his small business neighbors — those who managed to stay afloat — were in luck when San Francisco recovered. It relies on the technical workers of large employers such as Google as well as sales departmentwhich is a problem as these companies are flexible on return to office requirements.

While major cities across the country are struggling to fully recover from the pandemic, San Francisco is on another level as tech companies are ditching leases and residents are fleeing to more affordable locations. London Breed San Francisco Mayor’s Office estimates that a third of San Francisco’s workforce is now working remotely and out of town. This resulted in a whopping $400 million in tax revenue last year, according to the Comptroller’s Office.

The city center has finally come alive. There are more pedestrians, fewer shops are boarded up, and some restaurants and cafes that have closed have been replaced by new tenants. But no doubt the once bustling trades remain dormant, and tradesmen like Lak are in a haze of uncertainty, hoping that the workers will eventually return.

“The majority of our patients are large businesses and having them come back will help us stay stable,” Luck said in an interview with CNBC. “That’s what we kind of cling to – that’s recovery.”

Deepening the struggle is a reality Covid is not going away. With the advent of the omicron BA.4 and BA.5 sub-variants, the US is currently reporting an average of 126,000 cases per day this week, more than double what it was at the end of April.

San Francisco Mayor London Breed speaks at a press conference about the next steps she will take to replace the three school board members who were successfully recalled at City Hall on Wednesday, February. February 16, 2022 in San Francisco, California.

Gabriel Lurie | Chronicle of San Francisco | Hearst Newspapers via Getty Images

Bay Area residents who use public transportation still prefer to stay at home. Bay Area Rapid Transit’s average daily ridership has fallen from over 400,000 in 2019 to under 80,000 last year. As of May, that number has increased to nearly 136,000 on a weekday. BART website.

“We still wear masks in our office, so it’s still very much in our psyche,” Lak said.

Transport data reflects the real estate picture. San Francisco’s vacancy rate rose to 24.2% in the second quarter from 23.8% in the prior period, according to CBRE research. Other major cities are at historically high levels, but still below San Francisco.

Manhattan reached the highest ever in the quarter 15.2%. According to CBRE, downtown Atlanta is 22.8%, Chicago is 21.2%, Los Angeles is 21.8%, and Seattle is 20.3%.

“We’re slower than New York, we’re slower than Chicago, and it must be because we’re so dependent on technology,” he said. Robert Sammonsregional director of the Cushman and Wakefield research group in the Northwest.

Mayor Breed said in a recent CNBC interview that “most employees want to work from home when they’re back in the office, and many employers provide that as an option.”

Salesforce, San Francisco’s largest employer, said last week that cutting its office space in the city once again, and now listed 40% of the 43-story building that sits across the street from the main Salesforce tower. Coinbase closed his San Francisco office last year and Elevator pushed back his return to the office until 2023 soon. Most of the companies that have reopened have done so with an optional attendance.

Even Google, one of the most vocal tech companies, has backed off when it comes to getting employees back into the office. workers pushed back on demand, citing record profits made by the company last year. Management said it had approved 85% of requests to relocate or permanently work remotely.

“Failed to close the deal”

Tech companies with long-term leases are feeling pain as San Francisco commercial real estate prices have fallen 30-40% below pre-pandemic prices on average, market experts say.

Global logistics company Flexport, which has a central office on Market Street that once had 500 employees, has been unable to find a tenant to rent the space for more than two years.

“Throughout the pandemic, our office has been listed by CBRE for subletting, but due to increased inventory and fierce competition in the sublease market, we were unable to close a deal,” he said. Bill HansenFlexport’s global head of real estate said in an interview.

Flexport founder and outgoing CEO Ryan Petersen previously told CNBC that the company could not find anyone to fill the post. He attached a sad face emoji to his post and said, “The space is amazing – we just signed a high-stakes contract and the market has been very soft due to Covid.”

In the center of Rincón, where Twilight located, the food court has been almost completely cleaned out, with the exception of a couple of longtime tenants. Across the street, in One Market Plaza, Mediterranean restaurant Cafe Elena is the only open vendor. On the remaining five, the light is off, as it has been since March 2020. One market is home to Autodeskseveral floors of Google offices and CNBC studios in San Francisco.

“Everyone loses—it’s just a matter of how much,” said Colin Yasukochi, head of the CBRE Technical Analytics Center.

Salesforce Tower (left) and Salesforce West office building in San Francisco, California, USA Tuesday, February. 23, 2021.

David Paul Morris | Bloomberg | Getty Images

There is another side to the San Francisco real estate picture. Record prices in elite premises.

Sales force last year enumerated space in its east tower, which Squeal as well as Sephora both are sub-leased from the company. The terms were not disclosed, but real estate experts say they were expensive deals. In May, the Sobrato organization paid $71 million for a building in San Francisco’s South of Market, setting a record of over $1,700 per square foot.

Cushman and Wakefield’s Sammons said employers know they will have to offer more incentives to bring workers back and that “this can’t just be a diner anymore.” They are transacting now to prepare for such a future.

“We’ve seen some really big deals, and big tech companies are taking advantage of the market and realizing they’re more comfortable going back to the office part-time, and they’re going to need that in the future,” Sammons said. “These are the companies that have the funds to do these things.”

Waiting and hoping for a recovery

Wells Fargo analysts and others expect the downtown real estate market to recover significantly in 2024 and 2025. But there is no guarantee that San Francisco and nearby cities in the East Bay and Silicon Valley will fully recover.

House prices are still close to the highest in the country, and interest rates are skyrocketing to more than a million dollars. mortgage loans even more expensive.

“With no solution in sight to the region’s affordable housing crisis, it will be difficult for local firms to convince graduates to stay in the region,” Wells Fargo analysts wrote in this month’s report, “What’s next for the San Francisco economy?”

Bringing back the gold rush in the tech sector and persuading workers from other areas to move to the Bay Area will be even more of a challenge, the analysts wrote, although many companies have expanded or even moved outside the region. , the Bay Area still has the most complete technology ecosystem in the world,” they said.

Mayor Breed, who recently proposed the $14 billion annual budget for fiscal year 2022-23 recognizes that the world of work has changed. She’s counting on the cultural and tourist attraction of San Francisco to help the revival.

“Our concerts, our activities, our conventions, a lot of the things that people would want to visit a major city for, are things we should also be focusing on,” she told CNBC. “Working in an office is just an adjustment to change.”

The market faces additional potential turmoil as property contracts expire in the next year or so. Landlords are likely to be forced to offer better terms to tenants who are considering leaving or at least downsizing, experts say.

Some small businesses have entered into revenue-sharing agreements with landlords to reduce upfront costs and spread risk. Some are discussing sharing space with other tenants in ways that “have never been done before,” Sammons said, calling it “a whole new world in a way.”

At Laka’s clinic, business doesn’t go according to plan. He has had to cut his staff and rely on loans, which he says he will repay “probably for the rest of his life.”

But Luck said he’s seen recession cycles before and expects history to repeat itself.

“I’ve been through the dot-com crash and the housing bubble,” he said. “Recessions happen, and they eventually bounce back, too.” I hope that in four or five years it can become a more diverse set of businesses.”

— Yasmine Khorram of CNBC contributed to this report.

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